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For transfers of financial assets in the scope of ASC 860, a reporting entity must first determine whether the exchange involves an entire financial asset or only a portion of the asset. If it involves a portion, the transaction must be analyzed further to determine if the transferred portion qualifies as a "participating interest." To be eligible for sale accounting, a transferred portion of a financial asset must meet the definition of a participating interest. If it doesn’t, the transfer must be reported as a secured borrowing. Derecognition of the transferred portion of the asset is not permitted.
Applying the participating interest guidance can be among the most challenging aspects of ASC 860’s transfer model because:
  • The circumstances in which only a portion of a financial asset should be considered transferred – rather than the entire asset itself – is not always clear as a result of limited implementation guidance in ASC 860.
  • The participating interest model is form based and prescriptive. The conditions that a transferred portion of a financial asset must satisfy to qualify as a participating interest are very stringent.
  • The economics of a transferred portion of a financial asset, and the economics of a transferred entire financial asset with a retained interest, can be very similar. As such, distinguishing between the two can sometimes be challenging.

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